Haggen’s risky expansion largely bankrolled itself

The investment firm controlling regional grocer Haggen paid for most of the chain’s risky West Coast expansion by quickly flipping some of the real estate it received from acquiring 146 stores from Albertsons and Safeway, according to securities filings, court documents and county records.

That standard move from the private-equity playbook raised hundreds of millions of dollars and allowed the investment firm, Comvest Partners, to make a big bold bet without sticking its neck out too much. But it didn’t prevent the Bellingham-based grocery chain from quickly foundering, putting thousands of jobs in danger.

“This is a fairly common practice among private equity funds,” said Jay Maddox, principal with Avison Young, a real-estate-services company. Maddox, who has advised clients in numerous Chapter 11 bankruptcies, says that in the Haggen case, the upfront sale of the properties “reduced the private equity fund’s risk exposure substantially.”

In December 2014, the same month it struck a $300 million deal to buy stores that Albertsons and Safeway needed to jettison in order to consummate their $9.4 billion merger, Haggen inked an agreement with Spirit Realty Capital, a real-estate investment firm based in Arizona.

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In that deal, Haggen agreed to sell Spirit the real estate underlying 20 of the locations it would acquire from Albertsons and Safeway for $224 million, and then lease them back, according to securities filings.

Brokerage Holliday Fenoglio Fowler has said it helped Haggen sell and lease back the real estate for a total of 39 stores. Some of those likely went to Garrison Investment Group, a New York firm, which bought some stores for an undisclosed amount.

It’s unclear exactly how much Haggen raised from all the sale-leaseback deals, but regulatory filings and recorded real-estate documents indicate the total approaches $300 million, at least.

Haggen and Comvest would not comment on the transactions.

Haggen still owns the real estate for 24 of the stores it seeks to shed as it retreats back into its native Pacific Northwest, according to documents seen by The Seattle Times.

The real-estate divestments were instrumental in helping Haggen, then a regional 18-store chain, pull off the lopsided deal and sink an additional $100 million into its new empire. But in just a few weeks, the expansion ran into trouble.

To be sure, minimizing risk doesn’t mean Comvest has no skin in the game. Its ownership stake in Haggen is in danger if it doesn’t raise enough cash in its ongoing bankruptcy reorganization to pay off creditors.

The company hasn’t disclosed how much it paid for Haggen in 2011 or added for the Albertsons deal, but it says on its website that it generally puts down from $25 million to $100 million of equity into each takeover transaction it engages in. A person familiar with the situation said Comvest’s contribution for the Albertsons purchase was a “significant amount.”

The private-equity firm says its business model is to take control of midsize companies, grow them and flip them or take them public in a three- to seven year period.

Experts say that private-equity firms also like financing retail transactions by selling and leasing back the underlying real estate because it can be cheaper and easier than taking out a big bank loan.

When a complicated deal that requires quick execution is on the table, sale-leaseback deals are ideal, said Jonathan Hipp, CEO of Calkain Companies, a commercial real-estate-advisory firm in Reston, Va.

Hipp said this type of transaction is very common in the retail and restaurant world: An example would be last year’s $1.5 billion purchase by a real-estate firm of more than 500 Red Lobster locations when a private-equity firm bought the restaurant chain.

The Haggen acquisition seemed an ideal ground for the strategy. At least a third of the stores Albertsons and Safeway were being forced to ditch came with valuable underlying real estate. Most of these stores were also in the black, according to documents seen by The Seattle Times.

But when Haggen took over the operations, they saw a steep drop in sales. By the time it filed for bankruptcy Haggen had nearly tapped out a $180 million credit facility and was in arrears with suppliers.

Haggen blames Albertsons for allegedly sabotaging the stores it was handing over, and is suing for $1 billion.

In a securities filing, Albertsons disclosed that another purchaser of a small number of stores has made similar claims.

But Albertsons says all of those claims are without merit.

Other observers say Haggen and its owners just didn’t put in enough cash to see their project through, given its sheer magnitude.

“They didn’t have the plan, they didn’t have the financial wherewithal to execute,” says Neil Stern, a senior partner with McMillanDoolittle retail consultants.

So now Haggen has begun the process of selling or liquidating most of the stores it bought from Albertsons as it attempts to keep a 37-store core. Two California grocery chains have committed to buying 36 stores for $92 million in two separate so-called stalking-horse deals.

These deals will be tested at an auction on Nov. 9, where dozens of other stores will also be put on the block. A person familiar with the situation said there is considerable interest from potential bidders.

Spirit, the real-estate company, said in a document filed with the Securities and Exchange Commission that Haggen is one of its top tenants.

But it doesn’t seem too worried about the future of its investment even if Haggen drops the leases, because it has received plenty of interest about the space from other grocery-store operators: “We do not anticipate extended, if any, vacancy of these assets.”